Investors challenge Tilton's U.S. bankruptcy plan for her Zohar funds

FILE PHOTO: New York financier Lynn Tilton arrives for an appeal hearing at the U.S. District courthouse in New York, U.S., September 16, 2015. REUTERS/Brendan McDermid/File Photo

WILMINGTON, Del (Reuters) - A lawyer for investors in Lynn Tilton’s distressed debt empire told a U.S. judge on Tuesday that his clients plan to challenge her plan to use a bankruptcy filing to end years of legal battles over her private equity portfolio.

The comments kicked off the first hearing after Sunday’s Chapter 11 bankruptcy filing by three Zohar funds, which raised about $2.5 billion from investors to acquire equity and loans to companies that Tilton was trying to turn around.

An attorney for the Zohar funds told Judge Christopher Sontchi that bankruptcy would provide the best forum for resolving years of litigation that has dogged Tilton, the Zohar funds and her Patriarch Partners private equity firm.

The Chapter 11 filing was aimed at halting litigation in eight different venues and bringing more than a dozen parties to one court, according to Zohar attorney Michael Nestor. With the various strands of litigation on hold, Tilton planned to sell or refinance some of her portfolio companies and use that money to pay off in full the investors in the Zohar funds.

An attorney for holders of Zohar notes, however, warned that Tilton and the Zohar funds had to resolve who actually controlled the equity of the portfolio companies, which includes MD Helicopters, Stila Cosmetics and Rand McNally, a map company.

“The truth is the equity ownership does matter and it goes to the heart of what this case will be about, and that goes to control,” said Brian Lohan, a Sidley Austin attorney who represents holders of Zohar notes. He said the bankruptcy filing was “very surprising,” a point echoed by others, who said they had no warning the company was considering Chapter 11.

Nestor told Sontchi the equity ownership did not matter investors would eventually be paid off, resolving their dispute with Tilton.

Management of Tilton’s Zohar funds passed to an affiliate of advisory firm Alvarez & Marsal in 2016, as the portfolio companies struggled to pay off their loans. However, Tilton has argued that she retained voting rights for stock owned by Zohar, giving her control over the portfolio companies.

Since then, the investors and MBIA Inc, which insured the notes against default, have been locked in litigation, in part to determine who controlled Tilton’s portfolio companies.